Buy-side firms should be wary of overusing requests for quote
(RFQs) to evidence their best execution once MiFID II comes into
force on 3 January 2018, according
to a panel of experts.

Panellists said that while RFQs
could offer good proof of best
execution, there is a risk they will
be overused by firms attempting
to play it safe in the early days of
MiFID II.

Julie Beecher, an independentbuy-side consultant, told the con-ference’s best execution session:“RFQs make it easier to evidencebest execution but they also makea lot of noise and risk moving themarket.”Fabien Oreve, global head of trad-ing at Candriam Investors, agreed,adding: “RFQ is becoming verypopular and is a good developmentfor the industry, but you need tobe very careful how you use thembecause there is a higher level ofinformation leakage. Educatingtraders on when it is appropriate touse an RFQ will be important.”The panel believed that, immedi-ately after MiFID II is introducedthere could be a spike in RFQusage by firms taking a cautiousapproach to compliance, but hopeit will come down as firms realisethat information leakage is actingagainst their goals to achieve bestexecution.

Risk trading was also raised, with
the panel saying that any firm that
only trades on risk could fall foul of
regulators.

Ben Stephens, head of businessdevelopment at Instinet Europe,said: “You always need to ask if itis better at this time to trade onrisk instead of in the market. Eachcounterparty has something tooffer and if a risk trade offers youa better price at the time than youcan get in the lit market then youabsolutely should be trading onrisk in that situation.”Alasdair Haynes, CEO of AquisExchange, added: “Risk is abso-lutely critical in every market butyou should never use it for everytrade. Providers should give theirclients access to as many liquiditypools as they can, but we also needto recognise it is impractical to tapinto every pool with an expected50 systematic internalisers in themarket next year.”One panellist also warned thatthe industry needs to considercarefully how it applies transactioncost analysis (TCA) to non-equityasset classes as a way of achievingbest execution.

Beecher explained: “Fixedincome needs to take a differentroute to equities, with more inno-vation. TCA happened in the equityworld and the equity approach toexecution changed to fit it, I don’tthink it would be appropriate forthat to happen in fixed income, itneeds its own unique approach.”Oreve said that as more databecomes available under MiFIDII the fixed income market will beable to improve its execution qual-ity, but acknowledged that it facesits own unique challenges.What we need is for asset manag-ers to develop new TCA partner-ships that will look at a broader setof solutions to support multi-assetclass trading.”Traders warned notto become reliant onRFQs after MiFID II